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Introduction: In past audit practices, companies planning to go public that experienced significant fluctuations in performance would usually be subject to further inquiries from regulators, and Pioneer Precision was no exception.

Text | Daily Financial Report Qin Nan

Yin Zhiyao, chairman of AMEC, one of the leading domestic semiconductor equipment companies, said recently: "As of this summer, China's semiconductor equipment can be independently controlled. China has hundreds of equipment companies and more than 20 mature companies working hard to cover almost all ten categories of semiconductor equipment, so I personally still have great confidence. It should take us five to ten years to reach the most advanced international level. It is completely achievable."

Among hundreds of semiconductor equipment companies, Jiangsu Pioneer Precision Technology Co., Ltd. (hereinafter referred to as Pioneer Precision) is a precision manufacturing expert in key components in the domestic semiconductor etching and thin film deposition equipment segments. The company competes directly with international manufacturers in the field of etching equipment, whose product technology difficulty is second only to that of photolithography equipment. The company is also one of the few domestic suppliers of key components for domestic etching equipment of 7nm and below that have been mass-produced, and is also a key component supplier to North Huachuang, China Microelectronics Corporation, SMIC, Tuojing Technology and other companies.

On August 9, Pioneer Precision Technology issued an announcement to update the prospectus and stated that the IPO will be reviewed at the board meeting on August 16, 2024. As a semiconductor equipment industry supported by the state, can Pioneer Precision Technology pass the review smoothly?

Large performance fluctuations

The founder of Pioneer Precision is You Li, who has nearly 20 years of engineering experience in the field of aviation precision manufacturing. In 2008, he and his friends founded Pioneer Limited, the predecessor of Pioneer Precision. Currently, You Li controls a total of 52.64% of the shares and is the actual controller. Another important founder, XU ZIMING, is a Singaporean who has worked at Shanghai Jiaotong University and Nanyang Technological University, Singapore.

Among the main equipment in semiconductor manufacturing, etching equipment and thin film deposition equipment are internationally recognized as the two core equipment with technical difficulty second only to lithography equipment. They are also the two major equipment that account for a value share equivalent to that of lithography equipment in chip production line investment, especially accounting for 25% of the value of semiconductor equipment respectively.

Among Pioneer Precision's shareholders, Shenzhen Capital Group and its largest customer, China Micro Corporation, are both listed. In 2021, Shenzhen Capital Group and its investment institution Gaoyou Hongtu invested a total of 40 million yuan in the company and now hold 1.92% of the shares. In the same year, China Micro Corporation invested 40 million yuan in the company and now holds 1.93% of the shares, making it the ninth largest shareholder. In 2022, Pioneer Precision once again introduced external investment, with a post-investment valuation of 2.08 billion yuan.

Against the backdrop of a cyclical recovery in the global semiconductor industry, and especially the trend of accelerated domestic substitution in the domestic semiconductor industry chain, whether Pioneer Precision can seize the key opportunity of listing on the A-share market after completing the second round of inquiries has become the focus of market attention.

Compared with comparable companies in the same industry, Pioneer Precision achieved a revenue growth of 110.20% in 2021, reaching RMB 424 million. This is obviously the basis for the company's listing on the Science and Technology Innovation Board.

Its revenue growth rate far exceeds that of comparable companies in the same industry, including Fuchuang Precision, Kema Technology, Ferrotec, Jingding Precision, and Chaokelin, at 75.21%, 35.75%, 19.11%, 22.17%, and 46.64% respectively.

According to the IPO prospectus (draft filing) submitted by Pioneer Precision to the regulatory authorities, "In 2021, as the semiconductor industry's prosperity improved, customer orders achieved rapid growth."

The company also achieved a historic breakthrough in non-GAAP net profit that year, surging from RMB 25.74 million in 2020 to RMB 83.6226 million, an increase of 224.87%.

It was in 2021 that Pioneer Precision was able to successfully launch an IPO challenge on the Science and Technology Innovation Board, relying on its significant growth in performance and the support of important shareholder clients such as North Huachuang, a leading domestic semiconductor equipment manufacturer, and AMEC.

However, due to the inherent cyclical characteristics of the semiconductor industry, after experiencing a surge in performance in 2021, Pioneer Precision faced cyclical fluctuations caused by weak downstream consumer electronics demand and accumulated supply chain inventories in 2022. Its revenue growth rate slowed significantly to 10.87%, and its net profit growth rate even fell by 0.38%.

This year, Pioneer Precision's revenue growth rate ranked last among its peers, significantly lower than 83.18%, 34.04%, 55.57%, 19.68% and 23.41% of Fuchuang Precision, Kema Technology, Ferrotec, Jingding Precision and Chaokelin; in terms of net profit growth rate, Pioneer Precision and Chaokelin were the only two companies that declined, although Chaokelin's decline was even greater, at 65.14%. There was an obvious performance roller coaster phenomenon.

Especially in the first half of 2023, its performance growth was weak, with revenue growth of only 1.68%. Its non-net profit failed to continue the growth momentum of the previous two years, but instead fell by 45.27% year-on-year to only 25.61 million yuan.

Regarding the significant year-on-year decline in net profit in the first half of 2023, Pioneer Precision explained that it was mainly due to the strong cyclical short-term impact of the semiconductor industry.

In the first half of 2023, non-GAAP net profit fell by nearly 50% year-on-year, which is obviously close to the regulatory authorities' review red line for a sharp decline in performance indicators of companies planning IPOs.

Judging from Pioneer Precision's performance in the first half of 2023, it will be difficult for it to gain regulatory approval in the short term. Fortunately, however, since the third quarter of 2023, as the downstream market gradually recovered, its performance has improved substantially.

With the release of the 2023 full-year financial data, Pioneer Precision achieved operating income of RMB 557.7169 million, a year-on-year increase of 18.73%, and non-net profit of RMB 79.7854 million, a year-on-year decrease of only 19.37%. The decline in net profit for the whole year has been significantly narrowed compared with the first half of 2023.

In past audit practices, companies planning to go public that have experienced significant fluctuations in performance are usually subject to further inquiries from regulators, and Pioneer Precision is no exception. The Shanghai Stock Exchange requires it to analyze the sustainability of the company's revenue growth based on relevant business content, orders in hand, full-year forecasts for 2023, and changes in sales unit prices. It also depends on how the listing committee views the relevant performance information provided in the future.

Risk of actual controller

However, the company's IPO prospectus has several issues of concern, especially regarding "family control" and the dividend amount of up to 100 million yuan, which makes investors cautious about its future development. According to the information disclosed in the prospectus, the company's chairman You Li received a total dividend of up to 56 million yuan in the past three years.

In addition, since it has a large dividend and needs to raise funds to replenish its capital by 208 million yuan, one cannot help but question whether it is suspected of a surprise dividend.

The company's equity structure is highly concentrated. Youli actually controls more than half of the company's shares, becoming the controlling shareholder and actual controller.

This family-controlled shareholding structure has caused investors to worry about corporate governance structure, especially in private enterprises, where family control is often seen as a key factor in corporate governance risks.

Family businesses often have problems such as unfair personnel appointments and lack of transparency in internal decision-making, which may lead to poor corporate governance and internal violations, and have an adverse impact on the company's long-term integrity development.

In addition, Pioneer Precision also had problems with patent applications and information disclosure. The company applied for a large number of patents in the year before its listing, but its application motivation and the relevance of these patents to the company's main business were not fully disclosed.

At the same time, some of the company's patents were transferred from Youli, but the relevant licensing information was not disclosed, which raised questions about the company's patent strategy. In addition, the prospectus mentioned many times that the company had been punished, including failure to formulate production safety accident plans in accordance with regulations, false product declarations, and failure to conduct safety evaluations. These all reflect a series of problems and violations in the company's business management.

Number of R&D personnel

Regulators have paid particular attention to the significant growth of Pioneer Precision's research and development team in recent years.

In the past few years, as Pioneer Precision's business scale continued to expand, its total number of employees has also steadily increased, with the number of R&D personnel increasing from 58 in 2020 to 106 in 2023.

However, the total number of people transferred from within the company to the R&D team reached 48, some of whom had professional backgrounds not related to R&D.

In particular, in 2023, Pioneer Precision was in a critical stage of IPO application review, and the number of personnel transferred internally to the R&D department peaked at 19 that year. Specifically, from 2021 to the first quarter of 2024, the number of people transferred internally to the R&D department was 16, 12, 19, and 1, respectively, and these internal transfers accounted for 80.00%, 66.67%, 45.24%, and 100.00% of the newly added R&D personnel in the period, respectively.

During the IPO review, a large number of internal transfers of personnel in the R&D department raised questions about Pioneer Precision's motives. In response, the Shanghai Stock Exchange asked Pioneer Precision in its second round of inquiries to explain why so many internal personnel were transferred to the R&D department. The company responded that the R&D process involves many complex process step verifications. In order to ensure that the normal production activities are not affected and the integrity of the production team is maintained, the company selects suitable personnel with relevant work experience and a long working experience to join the R&D team and engage in R&D work full-time. Whether this explanation can convince the Listing Committee remains to be seen. But it is indisputable that the proportion of Pioneer Precision's R&D personnel in the total number of employees is lower than that of other companies in the same industry.

As comparable companies in the same industry recognized by Pioneer Precision, the data of Fuchuang Precision and Kema Technology provide a comparison. As of the end of 2023, Fuchuang Precision has 480 R&D personnel, accounting for 18.89% of its total number of employees, Kema Technology has 152 R&D personnel, accounting for 18.34% of its total number of employees, and Pioneer Precision has 106 R&D personnel, accounting for only 14.93%. Even with the continuous transfer of internal personnel to the R&D department, the proportion of its R&D personnel is still lower than that of its peers, which raises questions about how it can maintain its technological leadership.